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Financial Risk

Financial Risk. Cash is King in Business. Outline. Financial Risk: definition Business Risk: definition Components of financial risk Investing is risky business Financial inclusion Conclusion. Financial Risk: definition.

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Financial Risk

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  1. Financial Risk Cash is King in Business

  2. Outline • Financial Risk: definition • Business Risk: definition • Components of financial risk • Investing is risky business • Financial inclusion • Conclusion

  3. Financial Risk: definition • Financial riskarises from various financial decisions that a firm makes in terms of its mix of debt and equity to finance its operations. • The mix of debt and equity has a fundamental impact on the distribution of ownership within a firm and the way profits are shared and distributed. • A firm with a high ratio of debt to equity has a high level of financial leverage and, therefore, a high level of financial risk.

  4. Business Risk • Business risk covers a variety of factors: exposure to market risk, the volatility of a business to changes in the regulatory environment, and reliance on individual buyers and suppliers. • Afirm's ratio of fixed costs to variable costs is its operating leverage. The higher a company's operating leverage, the greater its business risk, because the loss of customers has a greater impact on its overall profits.

  5. Components of Financial Risk • Financial risk is an essential part of business operations and personal investing; understanding how best to manage financial risk can be the difference between making a huge profit or succumbing to massive losses. • Financial risk is the additional risk a shareholder bears when a company uses debt in addition to equity financing: more debt instruments mean higher financial risk. • The components of financial risk include; • interest rate, • the amount of credit, • the cash flow of the business and • the market risk.

  6. Investing is Risky Business • Be familiar with the different types of risk • Determine the level of risk associated with a specific investment; understand how much risk to expect from each type of investment. • Determine the level of risk to shoulder. When deciding on an overall level of risk, assess future investment options that would be available. • Reduce the portfolio's risk level by allocating assets widely; allocating assets widely hedges against the risk that certain asset classes will perform well while others perform poorly. • Lower each asset type's risk through diversification:A business should normally hedge against the risk that a single company or industry will perform poorly or go bankrupt.

  7. Financial Inclusion • Africa is now the world’s second fastest growing region after Asia, with annual GDP growth rates in excess of 5% over the last decade and projected to be 6% in 2014. • Growth has to be inclusive to be socially and politically sustainable; Less than one adult out of four in Africa have access to an account at a formal financial institution. .

  8. Financial Inclusion II • Broadening access to financial services will mobilize greater household savings, marshal capital for investment, expand the class of entrepreneurs, and enable more people to invest in themselves and their families; • More financial services, especially credit, are now provided to individuals and enterprises; • New technologies such as mobile money have helped broaden access to financial services, including savings and payment products.

  9. Financial Inclusion III • Often the main barrier to financial inclusion in rural areas is the great distances that rural residents must travel to reach a bank branch. • The lack of infrastructure may explain why Africa has been at the forefront of mobile financial services which is a bright spot in improving financial inclusion.

  10. Financial Inclusion IV • The main reason for not having a formal account is lack of enough revenue to use one. • Cost, distance, documentation, fixed fees and high costs of opening and maintaining accounts seem to be hindering factors in Eastern and Southern Africa.

  11. Conclusion • Like in other parts of the world, economic growth has its own risks - political, social and economic - which threaten the very existence and survival of infant investments. • As the EAC region develops other threats emerge including those associated with acts of terrorism, climate change, and social tussles over dwindling resources that are of major concern for business and pose a great danger to regional integration.

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